The World Bank has warned that the coronavirus pandemic has triggered the most widespread global economic meltdown since at least 1870, and it risks fuelling a dramatic rise in poverty levels around the globe. Edgar, Dunn & Company (EDC) has a working hypothesis that there will be a larger increase in total consumer debt, and we could be heading for a new financial crisis of crippling consumer debt.
Emerging from the lockdown, there are three main segments of customers. The first segment consists of customers that have been able to remain employed and continue to work from home. The lack of family holidays, lack of commuting – and with a shift in spending to essential items only – has meant that many households have been able to redirect available funds and repay their credit card debts and other unsecured loans.
The second customer segment is the group that was furloughed and saw a drastic fall in their household income. This segment has to keep an eye out on their outgoings, ensure their household bills are covered, and budget diligently. The need to take a mortgage payment holiday or skip one or two full payments of their credit card balance would be predictable behaviour by this segment.
The third and final segment of customers were made unemployed as a direct result of the pandemic, forcing businesses to shut down or go into bankruptcy. This third segment consists of the financially challenged.
In April 2020, the second month after COVID-19 containment measures were implemented by most EUMember States, the seasonally adjusted unemployment rate was 7.3%, up from 6.5% in February 2020 (pre-lockdown). The EUunemployment rate was 6.6% in April 2020, up from 6.4% in March 2020.
What does this mean for consumer lending in the post-pandemic world? Pre-crisis, we had seen a growth of instalment payments and buy-now-pay-later options appearing across a wide range of retail sectors, from fashion, travel, to big-ticket household products. This was partially a result of readily available credit to consumers. Companies such as Klarna, Affirm and Afterpay are some of the leading players in this space. The following graphic only illustrates a sample of the companies that allow consumers to buy goods or services from merchants and pay off those purchases in fixed monthly payments over longer periods. The benefit of using one of these payment options is they don’t always charge late fees, service fees, prepayment fees, or any other hidden fees. On the other hand, some providers will charge a fee if a payment is late or if a repayment is missed. The APR loan interest rates range from 10% to 30%.
Providers, such as Afterpay and Klarna, are touted as a new way to pay and different from traditional credit products, such as a credit card. This is particularly appealing to younger consumers who don’t have or want a credit card. By selecting these payment methods, the consumer has a set period to pay back the amount in three to four instalments, with no interest. Costs only incur if the consumer fails to make repayments on time. Some of these providers, including Afterpay, do not check the credit history before the consumer applies, but they still reserve the right to report defaults to credit reporting bureaus such as Experian or Equifax.
For merchants, struggling to encourage shoppers out of lockdown and into their stores and to spend what they may not have, extending consumer credit is an interesting proposition, allowing for sales to drop straight to the bottom line whilst effectively outsourcing the debt to third-party specialist providers.
Reduced disposable income of many individuals who have been furloughed or unemployed and payment holidays taken on credit cards and loans may have shifted some household spending to credit cards. Countries with a lower average revolving credit before the pandemic are expected to experience less change in consumer behaviour, as shown by Italy, Spain, and Germany.
EDC has found the availability of buy-now-pay-later options has significantly increased in most Western European markets, including the UK, France, and Germany. Understanding customer spending behaviour and holistically reviewing all the payment acceptance arrangements, regardless of the payment method, and making sure each element of your payment processing partners is working for your unique business requirements are fundamental for any type of merchant.
This article was published in our Payments Methods Report 2020, an extensive overview of what’s new in how people pay in the most relevant ecommerce markets.
About Mark Beresford
About Edgar, Dunn & Company
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